National energy markets in Europe are about to give way to regionalized, real-time energy markets. “Clean energy for all Europeans,” a proposal released by the European Commission on November 30, 2016, shows a pathway towards a customer-centric energy system, capable of integrating at least 27% renewable energy by 2030. Under the plan, it is clear that fossil fuels will slowly decline, but it remains to be seen which country will be required to squeeze the most. The proposal puts forth several radical changes – here are a few highlights we've been following.

Beyond national markets: The Energy Union

The proposal calls for EU-wide market coupling mechanisms and the advancement of the Energy Union. It introduces new market design concepts from the wholesale level all the way to the retail customer, and even behind the meter in so-called "energy communities."

Why? Because of the identified inefficiencies across EU states.

Among the reasons highlighted in the proposal, national markets suffer from very low levels of competition. They also tend to over-procure "national" resources without considering resources in neighbor states. That increases the cost of energy for end users.

So, what's the fix? Well, the European Commission responds with a mix of solutions.

First, the EC indicated that it's necessary to move EU countries from a collection of national energy systems with distorted price signals and unfair price caps to a regional system with energy zones that reflect real-time grid conditions. The proposal creates a new EU Distribution System Operator (DSO) in charge of coordinating transmission and distribution networks as well as integrating renewable energy and distributed resources. The DSO would also ensure that distribution networks are empowering consumers and building a plug-and-play network - à la New York Reforming the Energy Vision (NY-REV)- with smart grids and intelligent metering systems.

In the new structure, member states would be required to enable cross-border capacity markets. For example, a French distribution network operator could be led to dispatching aggregated German rooftop solar if it provides "equivalent technical performance to domestic capacities" under certain grid conditions.

Newly created regional operational centers would study power flows and determine the available interconnection capacity and congestion between different regions, called "bidding zones". Think Schengen Area for electrons. It's still unclear how large these zones would be and how they would interact with existing transmission system operators.

The proposal goes a step further and crosses the sacred line of electricity rates.

Residential and commercial customers will be exposed to dynamic pricing

The proposal as drafted would require member states to gradually phase out regulated retail energy rates and replace them with dynamic rates linked to the spot markets prices. If adopted, the proposal would also limit the ability of distribution utilities to set arbitrary “stand-by fees” to access the grid. Additionally, energy markets would be required to create electricity supply (i.e. capacity) contracts for demand side resources.

“Energy Communities”

Groups of customers would be allowed to generate and exchange energy without transacting through a distribution operator. These could be self-sufficient microgrids in neighborhoods and cities, for example. It's a concept that companies like Sonnen have spearheaded in Europe, allowing people to share self-produced energy with a network of customers. Per the proposal:

"With the new energy market rules in place all consumers will be able to generate, store and/or sell their own electricity to the market based on retail market conditions and taking into account the costs and benefits for the system as a whole." (New electricity market design: a fair deal for consumers. Page 4)

The proposal acknowledges that there could be some people left behind in a system where everyone is exposed the real-time market pricing. The Commission offers a fix. The Energy Poverty Observatory will help member states cope with energy poverty and allow temporary price regulation schemes to protect vulnerable customers. Its role would be to measure and monitor energy poverty.

What about energy storage?

At last, the EU has a definition for energy storage:

"'energy storage' means, in the electricity system, deferring an amount of the electricity that was generated to the moment of use, either as final energy or converted into another energy carrier."

In the proposal, neither distribution system operators (article 36, common rules for the internal market in electricity) nor transmission system operators (article 54) shall own, develop, manage or operate energy storage facilities. That appears to be a major shortcoming of the proposal.

Who are the winners in the proposal?

First, the losers. Fossil-fuels will be gradually phased out of the grid in exchange for wind, solar and distributed energy resources. Legacy distribution and transmission operators with strong national flavors will be required to make significant concessions to new entrants if the proposal is adopted. In a public statement released on December 8, ENTSO-E (the EU network of TSOs) warned of the potential conflicts that could emerge from creating these new regional decision centers and the potential overlap.

Regarding the winners. First, renewable energy. A minimum of 27% renewable generation mix by 2030, inclusive of both centralized and decentralized generation. However, the proposal is silent on the share of renewables for each member state.

The second winner is energy storage and demand side management. By removing participation barriers, stand-by charges, and allowing demand side resources to capture additional capacity payments and new arbitrage opportunities, the proposal will allow the rise of the distributed energy resources.

Finally, technology companies will play a key role in fulfilling the vision created by the Commission. The digitalization of the grid and the emergence of distribution level market platforms provide a significant opportunity for technology companies. The EU wants to encourage that technology to be home grown and anticipates mobilizing up to 177 billion euros of public and private investment per year from 2021 on, creating 900,000 jobs in the process.

The vision is laid out and it’s now in the hands of European Parliament and member states to decide how much power they want to give up.